How to make passive income from your debt
Jump to ⇒ to go straight into it
What does it mean to be in debt?
Being in debt is a state that requires you to repay your creditor back what they lent you or something of equal value. Money is often the subject being dealt with but other subjects such as services, time or goods can be used.
- Most of the time, the creditor will often condition the repayment of the debt by requesting some interest when the debts is being paid. The creditor benefits from the interest and it gives incentive to the debtor to pay back what is owed. The debtor benefits from instant free (for the moment) cash and potential to screw up their life and remain a slave to debt for the rest of their lives!
There are two kinds of debt.
Bad debt:
Borrowed money that is spent on liabilities, things that make you poorer.
People often apply for credit cards so they can have a little fun while putting off the consequences.
Loans from banks are made to buy a fancy new cars. But, notice that by the time that it is fully paid for, the value of the car would have dropped so much that it would feel like your paying a premium for a shiny block of scrap metal.
Even things like paying for college or university can technically be a liability as it is a gamble. There is no guarantee that that you will get a job in your chosen field. Especially if your chosen degree is something like Art History. It would be harder than most to turn this degree into an asset.
⇒ Good debt
Borrowing money to make you richer. For example, taking out a loan for an investment property or buying something that will give you’re a return above 100% over time. This is debt that is spent for assets.
Because of the bad debt, it is something that everyone is taught to hate and for good reason, you will have to give away your hard earned money to the bank or people you borrowed from and in the end, you would have spent more money that the actual cost of the liability.
If you want to buy a $100k Tesla, taking a car loan would mean you paying higher that the initial $100k. Instead of using that $100k to buy the car, you can use it to buy a property instead and list it as a rental. At this point, the monthly payments for the house could be $600. You can then renting out the house for $1000 which creates a $400 profit return. This money can then be used to pay for the tesla.
A little money would have to come from your pockets though, for the down payment to the loan and unless you raise the rent cost, you may need to also top up the $400 for the car payment. Sure, you'll be paying some money but at the end, you will have a property that still pays you, long after you've stopped paying for the car and house mortgage.
To go a step further, you can repeat the same process for a smaller property so you wouldn't need to pull anything from your pocket!
- Owning properties isn't the only thing you can invest in though, you could also invest in businesses Disclaimer: business have more risk but if they are successful, the return is huge and is very fast compared to properties
Summary
- Don't be afraid of debt unless you use them for liabilities.
- You will end up spending more if you use your loan to buy liabilities.
- If you really want that tesla, instead of getting a car loan, invest in something like a property that has a good return and use that money to pay for the tesla.
Click here to learn what liabilities and assets are